UK plans lower corporation tax to cushion hit from Brexit

LONDON/DUBLIN (Reuters) – Britain has announced plans to cut corporation tax to less than 15 percent in an attempt to cushion the shock of the country’s decision to leave the European Union, raising the prospect of competitive tax cuts across the bloc.

Finance Minister George Osborne told the Financial Times he wanted to build a “super competitive economy” with low business taxes and a global focus, signalling a determination to remain in his job when a new prime minister takes over in September.

The new rate, which was announced without a target date, compares with Osborne’s previous target to cut corporation tax to 17 percent by 2020 from 20 percent now. The average rate among the world’s most developed countries is 25 percent.

Confidence in Britain’s economy has been hit by the vote to leave the EU and a lower tax rate could help prevent an exodus of British firms and attract U.S. and European companies which might otherwise be put off by the uncertainty it has created.

“The prospect of a lower tax base remains appealing for some U.S. companies regardless of Britain’s future status within the EU,” said Ferdinand Mason, a London-based partner at law firm Jones Day. But Britain would also need to negotiate a Norway-style deal on market access with the rest of Europe, he said.

“If Britain is to become a truly attractive proposition to foreign investors, it is crucial that the UK negotiates a deal with the EU that gives it access to the single market.”

“WORLD IS CHANGING”

Ireland, where a 12.5 percent corporate tax rate has been a cornerstone of economic policy for 20 years, drawing investors such as Pfizer and Apple, said Osborne’s announcement showed how the Brexit vote had altered the dynamics of the EU.

“This is a very stark reminder of how the world is changing as a result of the referendum result in the United Kingdom,” Public Expenditure Minister Paschal Donohoe told RTE radio.

“The tectonic plates are shifting and this is a very early sign of it. It’s a sharp reminder here, to us, that your tax system and how it’s structured is an essential part of our national competitiveness,” Donohoe said.

Ireland’s transport minister said Osborne’s move was an “obvious attempt” to lure investors away from Ireland.

“If the headline figure was to come down to 12.5 percent in the UK, it would be threatening to us and we would have to adjust accordingly and make ourselves more attractive again,” Shane Ross, an independent minister, said.

The Netherlands said it would review its tax rates to ensure it remained attractive. “It is something we are thinking about with an eye to the future,” finance ministry spokesman Paul van der Zanden said. “On the one side we want to fight tax avoidance and on the other we need to look at our investment climate.”

A spokesman for Germany’s finance ministry said plans to cut corporation tax should be fair. “It is clear that it is the (German) government’s aim that the issue of taxes is dealt with in a fair way in the single market,” Martin Jaeger said.

Yet uncertainty over Osborne’s role in Britain’s new government leaves a large question mark over the declared goal.

“We don’t know when the tax rate will be cut or even if it will be cut because we don’t know if George Osborne will continue as chancellor,” said Helen Miller, associate director at the Institute of Fiscal Studies.

Cutting the rate from 20 percent now to below 15 percent would cost at least 10 billion pounds based on government estimates, she said.

The Organisation for Economic Cooperation and Development, in a June 24 internal email seen by Reuters, said a further cut in British corporation tax was unlikely due to a high political cost but if it happened it would “really turn the UK into a tax haven type of economy.”

“NOT THE RIGHT WAY” TO START EU NEGOTIATIONS

Some took the announcement by Osborne as the opening salvo in future negotiations with the rest of the EU about Britain’s relationship with its former partners.

Pascal Lamy, a former World Trade Organisation head, said Osborne was moving fast to activate one of Britain’s weapons in the talks as well as trying to reassure foreign investors who are worried about Britain’s access to the EU’s single market.

“I can understand that from his side but he has to think about the impact of this on the continent,” Lamy told BBC radio.

“If you want a proper balanced, win-win relationship in the future, starting with tax competition is not the right way psychologically to prepare this negotiation.”

Other elements of Osborne’s plan to steer the economy through the upheaval caused by the Brexit vote included support for bank lending to ensure credit does not seize up, more efforts to direct investment to northern England and maintaining Britain’s fiscal credibility, the FT quoted him as saying.

Last week, Osborne said he would no longer target a budget surplus in 2020 because of the expected hit to the economy from the referendum result.

Some politicians such as Molly Scott Cato, a member of the European parliament for Britain’s Green Party, said he was using the referendum result to accelerate policy planned anyway.

“He wants to usher in an era in which the UK embarks on a race to the bottom, not just through cutting corporation tax, but also on social and environmental deregulation and even more stringent public spending cuts,” she said.

“We need a general election so people have a chance to have their say on the sort of country we want to build together.”

Osborne’s softer approach to fixing public finances chimed with comments by interior minister Theresa May, the leading contender to replace David Cameron as prime minister.

Bank of England Governor Mark Carney said last week that he believed the economy would need more stimulus soon.

The BoE may move as soon as Tuesday to ease some of the capital requirements on banks and it will decide its position on interest rates next week. (Additional reporting by Anthony Deutsch in Amsterdam, Pamela Barbaglia and Kate Holton in London, Francesco Guarascio in Brussels; writing by William Schomberg; editing by Philippa Fletcher)